Frankland Company is an accrual method company, On December 30, 2003, it received a prepayment of $36,000 from a tenant, who is leasing a warehouse from Frankland. The payment represents the rental for the period January 2004 through December 2006. How much inocme does Frankland report in its 2004 tax return from this payment?
To determine the income Frankland Company should report in its 2004 tax return from the prepayment, we need to understand the accrual method of accounting and apply the relevant principles.
The accrual method of accounting recognizes revenue when it is earned, regardless of when the payment is received. In this case, Frankland Company received a prepayment for the rental of a warehouse from a tenant for the period January 2004 through December 2006.
Since Frankland is an accrual method company, the revenue should be recognized in the year it is earned, which means income should be reported based on the portion of the rental services that were provided in 2004.
To calculate the amount of income to report in the 2004 tax return, we need to determine the proportion of the rental services provided in that year. Since the prepayment covers a three-year period (January 2004 to December 2006), and the income should be allocated based on the services provided each year, we can divide the total rent received by the number of years covered by the prepayment:
$36,000 (total rent) / 3 (number of years covered by prepayment) = $12,000 per year
Therefore, Frankland Company should report $12,000 as income in its 2004 tax return from this specific prepayment.